ACTEC Comments on Rev. Proc. 2005-24

The Planned Giving Design Center recently noted that the American College of Trust and Estate Counsel has provided written comments to the Internal Revenue Service about Revenue Procedure No. 24 (Rev. Proc. 2005-24).

Rev. Proc. 2005-24 was issued by the Service on March 30, 2005, and was published in IRS Bulletin No. 16 in 2005 (2005-16 I.R.B. 909), dated April 18, 2005 , found online here. It has been effective since its issuance, but has raised concerns in practice.

The stated purpose of Rev. Proc. 2005-24 was as follows:

"This revenue procedure applies to any charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT) that is created by the grantor, G, if, under applicable state law, G’s surviving spouse, S, has a right of election exercisable on G’s death to receive an elective, statutory share of G’s estate, and such share could be satisfied in whole or in part from assets of the CRAT or CRUT in violation of § 664(d)(1)(B) or (d)(2)(B) of the Internal Revenue Code. In general, only inter vivos CRATs or CRUTs are within the scope of this revenue procedure."

In general, the guidance offered by the Service was summarized as follows:

"This revenue procedure provides a safe harbor procedure under which the Internal Revenue Service will disregard the right of election for purposes of determining whether the CRAT or CRUT meets the requirements of § 664(d)(1)(B) or (d)(2)(B) continuously since its creation if SS does not exercise the right of election. * * * The safe harbor procedure provided by this revenue procedure is not available to a CRAT or CRUT if S exercises the right of election."

ACTEC identified the means to address the Service's ruling:

To take advantage of the safe harbor provided by Rev. Proc. 2005-24, three requirements must be met. First, the grantor's spouse must execute a written, irrevocable waiver of any right to elect against assets held in a CRT for the CRT to be considered to function exclusively as a CRT from its inception. Such waiver must be valid under applicable state law and must be dated and signed by the grantor's spouse. Second, the waiver must be executed on or before the "due date." For this purpose the due date is six (6) months after the due date (excluding extensions of time to file actually granted) of the CRT's tax return for the year in which the later of the following occurs: (1) the creation of the CRT; (2) the date of the grantor's marriage; (3) the date the grantor becomes domiciled or resident in a state whose law provides a right of election that could be satisfied from CRT assets; or (4) the effective date of a change in applicable state law creating a right of election. Third, the grantor must provide the trustee of the CRT with a copy of the signed waiver. The trustee must retain the copy of the waiver with the official records of the CRT.

The PGDC previously posted at least two articles expressing concerns about the pending Revenue Procedure:

*Online Article, posted April 4, 2005, by Lawrence P. Katzenstein and edited by Stephan R. Leimberg.

*Online Article, posted November 23, 2005, by Stephan R. Leimberg.

The recent, very extensive comments by ACTEC began with identification of the organization and a summary of practitioners' concerns:

I am pleased to submit the comments of the American College of Trust and Estate Counsel ("ACTEC") with respect to Revenue Procedure 2005-24, 2005-16 I.R.B. 909, effective March 30, 2005 ("Rev. Proc. 200524"). ACTEC is a non-profit professional association comprised of approximately 2,600 lawyers who are selected on the basis of professional reputation and ability in the fields of trusts and estates and on the basis of having made substantial contributions to those fields through lecturing, writing, teaching, and bar leadership activities. The purpose of this letter is not only to express ACTEC's reservations with respect to Rev. Proc. 2005-24 but also to propose a conceptual framework for addressing both the concerns of the Internal Revenue Service (the "Service") as embodied in Rev. Proc. 2005-24 and the concerns of estate planning lawyers and trustees of charitable remainder trusts ("CRTs").

The ACTEC letter then describes perceived problems with the "safe harbor" waiver from four perspectives -- the Donor, the Trustee, the Charity, and the Service.

After detailed examination of issues, the ACTEC letter concludes:

ACTEC believes that the Service is justified in concluding that the likelihood of any particular spouse actually taking assets of a CRT pursuant to an elective share right is so remote as to be negligible and may be ignored as a contingency which would cause the CRT to fail to meet the definition of and function exclusively as a CRT from inception. Therefore, ACTEC urges the Service to insert the following language at the end of the first sentence of Treasury Regulations § 1.664-1(a)(4):

A trust will not be regarded as failing to meet the definition of and function exclusively as a charitable remainder trust from the creation of the trust merely because under applicable state law the grantor's spouse possesses a right to receive an elective share of the grantor's estate that may be satisfied in whole or in part from assets of the trust.

The ACTEC letter was submitted by Judith W. McCue. It notes that the comments were prepared by Robert J. Rosepink of Rosepink & Estes, P.L.L.C., Scottsdale, Arizona, Tumey Berry of Wyatt, Tarrant & Combs, L.L.P., Louisville, Kentucky, Martin Hall of Ropes & Gray, L.L.P., Boston, Massachusetts, Erik Dryburgh of Silk, Adler & Colvin, San Francisco, California, and Reynolds Cafferata of Rodriguez, Horii & Choi, L.L.P., Los Angeles, California.